Hello, everyone, and thank you for joining Peter Bevan and myself as we present BHP's 2019 financial year results. As always, please note the disclaimer and its importance. So today, we announced a strong set of results built on our foundation of simplification, capital discipline and culture. This underpinned record cash returns to shareholders and a return on capital employed of 18%. It's a product of our strategy, which over the past 5 years has seen us increase volumes by 10% and reduce unit costs by over 20%.
Our focus remains as strong as ever to maximize cash flow, maintain capital discipline and increase value and returns. And there are significant opportunities ahead to further transform our business and grow value and returns for our shareholders. But first, let me give you a rundown of our full year results. Higher prices and solid operating performance contributed to underlying EBITDA of $23,000,000,000 at a margin of 53 percent as well to strong operating cash flows. And we use this cash to progress attractive growth projects and after disciplined investment converted this into a free cash flow of $10,000,000,000 We've announced a record final dividend of $0.78 per share.
That's a 73 percent payout ratio or $4,000,000,000 which is on top of the $17,000,000,000 already distributed to shareholders this year. We've also invested in our future. We've had further exploration success in copper and oil. And with the approval of the Ruby oil and gas development this month, we now have 6 major projects under development. All of these are on schedule and on budget and they deliver average returns of around 20%.
We apply the same discipline to our small projects as we do to our major ones. We achieve these results so through the hard work and ingenuity of our people. So their health, their safety and their well-being is and will always remain our highest priority. So it's with great sadness that last December, our colleague, Alan Houston, died at BMA Soraji mine in Queensland. Alan's death impacts us all and serves as a stark reminder of why safety must always remain at the forefront of what we do.
After a thorough investigation, we could not determine the direct cause of the incident. However, we have identified several areas for improvement. And as always, we shared the detailed findings of this investigation and redoubled our commitment to safety. And of course, it's reinforced our drive to improve our safety culture and strengthen the quality of our field leadership program. This year, our leaders again spent more time in the field as they coach their teams to identify and speak up about safety risks.
While we saw a slight increase in total recordable injury frequency to 4.7 per 1000000 hours worked, we reduced the rate of events with a potential to cause a fatality by 18%. And we are encouraged by this result. Nonetheless, there is still more work to do. Last year, we reduced our Scope 1 and 2 greenhouse gas emissions compared to our target baseline by 3%. It's a good result, but we again have more to do.
So that's why just last month we committed $400,000,000 to address emissions operations and our value chain. Safety and our approach to global warming are critical components of our overall focus on social value and we'll update you on this more later this year. So I'll now hand over to Peter to take you through our financial performance in detail.
Thank you, Andrew. A solid second half performance sustained our strong earnings and further strengthened our financial position in the 2019 financial year. Excluding onshore U. S, we generated underlying EBITDA of $23,000,000,000 with a margin of 53% and underlying attributable profit of $9,500,000,000 These results are largely in line with last year and demonstrate the consistency of our business, a product of our diversification and solid operational performance. Including onshore U.
S, underlying attributable profit was $9,100,000,000 up 2% and underlying earnings per share increased by 5% due to fewer shares on issue following the buyback. This year we recognized an exceptional charge of $818,000,000 This consists of a $240,000,000 gain related to global taxation matters resolved during the first half and a $1,100,000,000 charge related to Simaco. This is largely due to updated estimates for Renova's programs and a provision for accelerated decommissioning of the Germano dam. Including these, our attributable profit was $8,300,000,000 Higher prices and the stronger U. S.
Dollar increased EBITDA, as shown on the waterfall chart. We delivered underlying productivity improvements of $1,000,000,000 with record throughput at our Chilean copper assets and record volumes at several Australian operations. However, these gains were offset by several factors. Significant resource headwinds, most notably copper grade decline had an $800,000,000 impact. Unplanned outages in the first half amounted to another $800,000,000 and we had a higher unit cost in coal due to a higher strip ratio.
Stable operations in the second half have locked in this year's underlying productivity gains. And over the medium term, we expect grade and strip ratios to stabilize and our transformation program to further improve operational performance. Our results were underpinned by a significant contribution from each of our commodities. Western Australian iron ore generated EBITDA of $11,000,000,000 at a margin of 65%, the highest since 2012 when prices would double 2019 levels. Though an 18% increase in prices clearly helped, this outstanding result can be attributed to our team's ongoing efforts to realize cost and volume efficiencies.
We finished the year with record volumes at Jumbalbar and an exit run rate above 290,000,000 tonnes per annum. Despite the train derailment and the cyclone, we continued our multi year track record of reducing unit costs. For the full year, we delivered sector leading C1 costs of below $13 and will not only sustain, but build on the strong performance in future years. In copper, optimized maintenance strategies produced record throughput at each of our Chilean operations. This helped offset a 12% decline in concentrate grade at Escondida.
Despite this and payments of the end of negotiation bonus to the unionized workforce, Escondida's absolute costs remained flat year on year. However, with prices 13% lower, overall copper EBITDA decreased to $4,600,000,000 While Escondida's medium term cost guidance remains unchanged at less than $1.15 per pound, guidance for next year reflects significantly lower byproduct credits. Our coal business contributed EBITDA of $4,100,000,000 at a margin of 45%. A solid operating performance, which included record production at BMC, helped offset a 10% increase in strip ratio and the impact on unit costs. And finally, in petroleum, higher prices and strong uptime performance supported a 14% increase in EBITDA to almost $4,000,000,000 Total production increased by 1% despite planned maintenance activities and natural field decline of around 5%.
Even with fluctuations of prices and volumes over the past few years, our diversified portfolio has provided strong and stable cash flows. Over the last year, net operating cash flow was $17,000,000,000 in line with the previous 2 years. After disciplined investment, free cash flow was $10,000,000,000 BHP has now generated over $35,000,000,000 of free cash flow over the past 3 years and this excludes the $10,000,000,000 in proceeds from the sale of onshore U. S. Our capital allocation framework informs every financial decision we make.
We use it to transparently guide capital between the balance sheet, investment and shareholders in order to maximize value and returns. It's continued to work well. And I'll step you through this. Over the year, we maintained our strong balance sheet and reduced net debt by $1,700,000,000 to $9,200,000,000 Investment in maintenance, gross projects and exploration totaled $7,600,000,000 Guidance for CapEx remains below $8,000,000,000 for the 2020 financial year and at approximately $8,000,000,000 for 2021. With our balance sheet strong and capital expenditure at the optimal level, remaining cash is only one place to go.
Over the past 12 months, we returned $17,000,000,000 to shareholders, a record amount. And today, we announced a further $4,000,000,000 in cash returns with a record final dividend of $0.78 per share. This includes US0.53 dollars under the 50 percent payout ratio and an additional amount of US0.25 dollars or $1,300,000,000 We're acutely aware of the current trade tensions and consider downside scenarios in all our cash allocation decisions. With our balance sheet's solid operational performance and a flexible dividend policy, we're well positioned to weather any future volatility. Now before I move on, let me remind you that under the new financial reporting standard on leases, IFRS 16, approximately 2 $300,000,000 of operating leases are brought onto the balance sheet from 1 July 2019.
A change in our definition of net debt to include the fair value of debt related derivatives will also increase net debt by $200,000,000 So had these changes been in effect at 30 June 2019, net debt would have been $11,700,000,000 Additional new leases commencing in the 2020 financial year, largely related to the desalination plant under construction expense are expected to increase net debt by a further $1,300,000,000 So reflecting these impacts, which totaled $3,800,000,000 we've revised our net debt target range to between $12,000,000,000 $17,000,000,000 There is no change to our cash flows due to the application of IFRS 16 And we continue to expect net debt to remain at the lower end of this revised target range in the near term. Over the year, our return on capital employed, excluding shale was 18%. Our Western Australian iron ore business led the way with a near 40% return on capital. Strong operational performance, particularly in the second half, allowed us to capitalize on higher prices. Queensland Coal again provided us a strong return of around 30% despite the stripping and weather challenges over the period.
And conventional petroleum posted a significant year on year improvement with a return of just below 20%, up from 12% in the prior year. Our copper assets had a tougher year from a returns perspective. The softer prices, grade decline and unplanned outages at Olympic Derm and Spence weighed on returns. At Pampanoate, returns on the existing business, so excluding SGO, are 16%. And while their bright spots and underlying performance at Olympic Dam, the team there is focused on delivering a multiyear program of work to improve stability and growing production through access to higher grade ores and increased throughput, and both are key to improving returns.
In summary, we delivered well against our plants. We exited shale cleanly, invested in high return projects, reduced net debt and returned a record amount to shareholders, including the buyback of limited shares at below AUD28. With our operations stable over the past 6 months, we've delivered $1,000,000,000 of underlying improvements in productivity, building on the past few years. And we're pressing ahead. Our transformation program and strong suite of options will offset inflationary and resource headwinds and set us up to deliver at 2017 prices returns around 20% in the medium term.
We're ready for whatever the future holds and we'll remain focused on maximizing cash flow, maintaining capital discipline and increasing value and returns in accordance with our capital allocation framework. Thank you.
We operate in an uncertain world. Unpredictable policies, trade volatility and a slowdown in global growth have weakened confidence and affected commodity markets. And we do remain cautious about the short term outlook. But as we look ahead, we are positive about the long term outlook. We know this because we want scenarios and monitor strategic themes to guide our actions in order that we create a portfolio of assets and options that thrives in any future.
From this, we're confident that our portfolio is well positioned to seize the opportunities that will come from the inevitable population growth, higher living standards and megatrends such as electrification and decarbonization, all of which are likely to increase demand for our products for decades to come. Our timely demerger of South32 and more than $18,000,000,000 of divestments have shaped our portfolio around some of the world's best assets across commodities that all have attractive fundamentals. And with our simplified portfolio, we've made significant changes to our operating model to consolidate functions globally and embed common processes, systems and practices. Since 2015, we've sustainably reduced overheads by more than $1,500,000,000 And the continuation of our transformation programs, which include world class functions, will remove an additional $500,000,000 To further harness the power of our operating model and maximize efficiency, we invest in our people and in our centers of excellence for maintenance, engineering, projects and geoscience and in automation and other areas of innovation all of which create a culture and a workforce that is more empowered and connected than ever and will allow us to meet future challenges. It will also drive greater operational and capital productivity and ultimately cash generation for years to come.
So for example, our maintenance team at Dornier last year used new technology and the BHP operating system to refine their work. And this reduced truck downtime from 1 hour to just 20 minutes per week. And when we apply this across Dornier's fleet, this equates to additional coal production of around 25,000 tonnes each year. And this is just one initiative at one mine. Imagine the impact of these incremental improvements when they're applied all the way across BHP.
Now we also know that a diverse workforce that represent the fabric of our communities is safer, it's more innovative and more productive. And that's why we are focused on greater female and Indigenous representation across our global workforce. And that includes our aspirational goals to achieve gender balance by 2025 and to increase indigenous employment in our Australian businesses by over 40% by the end of 2020. A strong, empowered and inclusive culture, our simplified portfolio and world class assets increase our competitive advantage and set us up for long term value and returns. So let me now turn to our business performance.
We had a strong year and it was built on improvements we've already made. For the past 5 years at Western Australian Iron Ore, we lifted plant and equipment performance to well above design capacity of 240,000,000 tonnes a year. In total, we've increased production by 20% and reduced costs by 50%. We're now the lowest cost annual producer and have plans to go lower as we work towards 290,000,000 tonnes a year on a sustainable basis. Over the past 5 years at Queensland Coal, despite a 14% increase in strip ratios, we have increased production and reduced unit costs by over 15%.
At Olympic Dam, while the surface operations have experienced challenges, underground development has progressed well with record kilometres drilled. And we've made good progress to catch up on maintenance and our plans are now firmly focused on the stabilization of the asset and medium term growth. Finally, over the past 5 years at Nickel West, the team has reset its cost base and created options to well above the current 90,000 tonnes. Increased exploration has already delivered positive results with contained nickel reserves now more than 75% above 2018 levels. This is Nickel West's valuable asset to hold as we monitor the expected growth in battery markets.
Across our Australian assets, our new operation services model will reduce our reliance on external contractors and mitigate skilled labor shortages. While we're in the early stages of its rollout at the most established sites, we've already seen improvements in labor productivity of 20% and a reduction
in
injury rates of 50%. As part of our transformation program, we expect the gradual deployment of autonomous trucks at our Australian coal and iron ore sites, and they'll unlock further efficiencies. A decision to proceed with our first deployment at Queensland Coal's Goonyella mine is expected to be made by the end of next month. Over the past 5 years at Escondida, despite grade decline of 35% and higher power and water costs, a 50% lift in concentrated throughput at Escondida and a 10% higher site wide recovery have maintained annual production from Escondida at approximately 1,100,000 tonnes and they've kept their costs flat at just over $1 a pound. We've achieved all of this while improving the sustainability of our assets.
So across our Chilean operations, we've made large and early investments in desalination in both the Escondido and Spence. And that will reduce our reliance on the aquifer. And in the medium term, we aim to source most of the power for this process from renewables at significantly lower cost than current carbon based sources. By dispense, we deployed new leaching technology, which has increased throughput and improved recoveries. In just 2 years, it's up by 14%.
And the growth project to unlock the hypergene at Spence is on budget. We now expect 1st copper production to be ahead of schedule in the first half of the twenty twenty one financial year. So that together with the current operations, total annual copper production over the 1st 4 years will now reach 300,000 tonnes. At Janssen, final lining is being installed in the shafts. We expect this to be completed by early calendar year 2021 as we finalize the feasibility study in parallel.
And in copper exploration, we added to our set of options in Ecuador, in Canada and Mexico. In petroleum, over the past 5 years, our operating performance and high return in fuel drilling programs have stemmed fuel decline and delivered strong margins as well as reducing unit costs by 25%. My Dog Phase 2 and Atlantis Phase 3 are on schedule and on budget. Just this month we approved the Ruby project in Trinidad and Tobago. In the medium term the combined volume produced from these major projects will more than offset fuel decline and lift our total production.
During the 2019 financial year, we discovered hydrocarbons at 7 of our 9 wells. We had drilling success in Mexico, the U. S. Gulf of Mexico petroleum exploration strategy has increased our 2C contingent resources by more than 55%. This is a lead indicator for future production and it excludes our evaluation of the successful Phase 3 drilling campaign in Northern Trinidad and Tobago and the latest well at Treon, which was drilled in July.
And this well didn't encounter a gas oil contact as expected and that indicates there's more oil there than we previously thought. So to recap, over the 2019 financial year, our disciplined execution of plans, simplified portfolio of world class assets delivered a strong performance. And we carry this momentum into the 2020 financial year as we remain focused on cash flow, capital discipline and volume returns. In the year, we expect volume growth of 2%, disciplined investment in our quality set of options and a further increase in return on capital employed, which at spot prices will reach 19%. Although we're well positioned for the future, there's still more we can and will do to maximize the value of our assets.
Our transformation programs will standardize the way we work. It will lift our workforce capability, establish innovative partnerships and create more stable and predictable operations. Our future prosperity also depends though on our ability to cultivate more opportunities. And we have a strong set of options to grow value that spans various stages of development and covers a range of commodities. They're also spread across each quadrant of the risk return matrix.
And this allows us to balance return on capital employed, value growth and cash returns to shareholders. Our disciplined framework makes sure always that we deploy capital and cash to the right project at the right time. So to conclude, BHP is set up to deliver strong returns over the short, medium and long term. We have a solid outlook for both volume and costs, The quality of our assets, our strong balance sheet, our empowered culture and capable workforce will grow value for decades to come. BHP is well positioned for a great future.
Thank you.
Hello, everyone, and thank you also for joining Peter Bevan and myself to discuss BHP's results for the 2019 financial year. I'm also joined in the room by Christian Lobgrove. He's our new Chief Investor Relations Officer, who many of you will have the opportunity to meet over the next few weeks. In the 2019 financial year, we delivered record cash returns for shareholders. The Board has declared a final dividend of US0.78 dollars per share or approximately $4,000,000,000 in total, and that's on top of the $17,000,000,000 we've already returned to shareholders this year.
Higher prices and a solid underlying operating performance contributed to an EBITDA of $23,000,000,000 at a margin of 53% and of course, strong operating cash flows, which after disciplined investment we converted into a free cash flow of $10,000,000,000 Over the year, our return on capital employed excluding Operationally, strong results in petroleum and iron ore offset lower contributions from copper and from coal. Over the past 5 years, BHP volumes were up 10% and unit costs were down by over 20% across our major assets. In that same period, our Western Australian iron ore business has increased production by 20% and reduced costs by 50%. That means we are now the lowest cost iron ore producer in the world. And we achieved these results through the hard work of our people.
And that's why their health, safety and well-being is and always will remain our highest priority. And so it was very tragic that last December, our colleague Alan Houston, died at BMA's Seraji mine in Queensland. After a lengthy and thorough investigation, we could not determine the direct cause of this incident. But we did, however, identify several areas for improvement and, of course, have redoubled our commitment to safety. We entered the 2020 financial year with a very positive outlook for our business.
That's because we have a simplified portfolio of world class assets and a strong balance sheet. And as you've seen today, with a high quality of operation, We have 6 major projects on track and on budget in iron ore, copper, oil and potash. We have exploration licenses in the world's top basins with options for future development and a greater focus than ever on workforce capability, getting an empowered culture and technology also add up to further transformations of our business to improve its efficiency and effectiveness, both in terms of operational efficiency and capital efficiency. And that's why I'm confident this will deliver value and returns for shareholders for decades to come. But I'll leave it there and open the line now for questions.
Our first question comes from Paul Young from Goldman Sachs. Please ask your question.
Hi, Paul.
Yes. Good morning, Andrew. Very clean set of results here. Just a few questions on copper and then oil. First one is on FY 2020 cost guidance at Escondido.
I see production is increasing by 5%. Unit costs are actually increasing 10%. So I'm wondering what's driving that and what would drive unit costs down to a medium term target of $1.15 a pound as grade declines? And the second one, Andrew, is on the oil division and I appreciate all the drilling and reserve disclosure. That's much appreciated.
A question is actually on Trian. I see that your 2C reserves have increased by about 200,000,000 barrels so far. So I'm curious about this is really shaping up now. What is your total reserves for the field now? Any upside scenarios you can talk about?
And do you have a target for 1st year production? Thanks.
Okay. Let me handle the oil question. And then perhaps, Peter, you might want to just go into the detail of the copper question. There are some issues there, quite complex to do with co product credits and how we mine through the ore body. We may have to get back to you and Peter can give you some of the things.
So on Treon, yes, the last 12 drill on Treon didn't find a gas oil contact. We thought there was a reasonable amount of gas in the crown of the structure. And we now realize this is maybe there may not be a gas cap or if it is, it's very small. And therefore, that combined with some of the other wells has increased particularly the liquid content of that deposit. I don't have the exact reserves to hand, but I'll get the IR guys to get back to you on that.
And of course, we are working hard with the authorities in Mexico to figure out now what we think should be a very impressive development and the right phasing to do that. But maybe Peter you might want to add to some of the detail of the copper.
Sure. So Paul just as always a few things sort of moving in Escondido. Firstly, probably another 5% down on grade this year, this FY 2020 year and then sort of then it stabilizes happily. But in the meantime, we've got that. At the same time, we've got lower byproducts, a little bit of grade and obviously a little bit of price, but mostly grade.
As you know, it's just really it's a gold thing. But offsetting that sorry, also that we have higher stripping, So that's also going to crimp. And then and again after FY 2020 has sort of settled down again. But offsetting that is more productivity. That story continues at Escondido and we will get more throughput.
And recoveries are going quite well. It's not just a recovery thing by pushing material out of leaching into concentrators. Obviously, that's been a very big thing. But also, we are getting decent recoveries out of the sulfide leach as EPP 4 really starts to hit its trap. So a decent story there.
It will continue to be, I think, a very good cash return for us for the next decade, depending on copper prices, obviously.
Next question?
Our next question comes from Sam Webb from Credit Suisse. Please go ahead.
Hi, Sam.
Hi, Andrew. Just 2 for me quickly. Scarborough, if we can start with some comments from your partner this week. Just interested in what are the key terms from your perspective still to be determined to reach an investment decision here? And is early 2020 still feasible from your perspective?
And on met coal, strip ratio is still expected to unwind over the medium term and just conscious that we increase again in FY 2020. When is the 1st year that strip ratios are expected to come down?
Okay. So look on Scarborough. Again, I'll hop on to the coal one and then Peter may have a bit more of the detail on 1 or 2 of these things. On Scarborough, there's not a lot I want to say. I mean, we've enabled this development in the first instance by effectively selling down our half of our holding previously to Woodside and they ultimately then bought out ExxonMobil.
And so that has definitely moved it up the queue. I mean clearly we think this is potentially an attractive development and the debates that we're having as to how is the most effective way to process the products or the gas and associated liquids that come out of the production of Scarborough. These are very confidential discussions between ourselves and obviously the counterparties. And I intend to keep them that way until we can resolve them. Peter, I mean, I think on the met coal one, I mean, there's a lot of again, there's a lot of moving parts there, but we are looking forward to as you've seen, we've guided to falling costs, even though we are facing a fair bit of inflation where we believe that we can offset that through a combination of volume dilution on a unit basis.
But some of the increased stripping we've been doing of late really comes through. And we have a number of productivity measures there as well. I think most prominent of which is a reduction in cycle times through just getting the movement of the mobile fleet more efficient. But I think there's some other detail on that that Peter would then you may appeal to fill in on that as well.
That's a
good summary, Andrew. I mean, I think from a strip pressure that really is a specific question. I think we'll it continues at a reasonably elevated level this year, probably into next month again, then it starts to fall away. At the same time as the funds come through, so that's a good combination obviously. And as Andrew described this in addition to that, we will also be able to continue to reduce costs through productivity.
So that's why we are expecting something in the order of $10 a ton reduction maybe more
in Queensland Cove. Next question.
Our next question comes from Paul McTaggart from Citigroup. Please go ahead.
Hi, Paul.
Hi, Andrew. I just want to get a
sense of resolution and I know that's still some way off, but plenty of risks around the deep block cave. And what would be I know it's not your project, but you can obviously see what's been going on with OT, Otolgoi. How would how do you think about the risks around large block scale block cave developments? And what sort of level of work? And obviously, in OT, there's been some discoveries around geotechnics subsequent to initial planning.
How does that make you think about resolution? And what additional work do you need to do to be confident ultimately that you've got a project that's going to work for the money that will need to go into
it. Okay. You're right. It's not our project. And I do not want to give you a detailed answer to resolution.
I think that's Rio Tinto's job. But I might offer some more broader commentary on capital investment and block caves generally. Look, we have to find a way to test the likely performance of a Block Cave resolution as cheaply as possible. And we certainly have no problems with the an appropriate front running of a modest investment that would actually derisk or otherwise the investment in that project. And I think we have good agreement with the operator there.
I think the more you are able to in these large developments that we face in some way invest a small amount of capital, which can lead to more capital being invested later, but not if it's the case to in some way derisk a project, the better. And part of our success in
and I
think in improving our capital efficiency, instead of going for these big bang early investments that the net present value calculation would say you should do because you're worried about the time value of money. Less of a concern I would say these days with such low interest rates. You actually try and just kind of get in, in a small way into the elements of the project, into the ore body, understand what's going on, put a small cost, which can be added to a bigger project rather than rushing in upfront. I think as you look at what we've done recently, we've actually done that, I think quite successfully in the way, if I may add, that we've approached our Janssen development, the careful way in which we're thinking about Olympic Dam. We have similar ideas around how we might develop Treon.
And clearly, we would hope to see a similar approach at resolution. Ultimately, this means that we spend a lot less capital. It may not make ultimate sense from an overall NPV, but the flexibility you give yourself to take account of what's going on in the marketplace, what's going on in the ore body, what's going on in the politics, going on in the technology. It's something I've been pushing for some time and I think we now see it in the way we do capital in BHP and which is why we have a much lower spend, yet still can grow this company with a higher level of capital efficiency because ultimately that flexibility is worth a lot more than it might seem if you did assisted a simple NPV. It's also about going slow.
I always say there's value in delay. Take your time, study, reflect on these things and ultimately you'll find a better way of doing it.
Our next question comes from Lindon Fagan from JPMorgan.
Look, my first question is just on Jimbalbar. At around 60,000,000 tonnes, it's a sizable asset, but doesn't appear to be delivering the grade that you were hoping for. And I'm just wondering whether you could sort of fully explain what's happened there. Are we behind on stripping? Or is there some other issue around why the grades are underperforming and how they're affecting the broader portfolio?
And the second question is just on the FY 2021 CapEx guidance. At around €8,000,000,000 it's quite a bit higher than consensus. I'm just wondering if you could maybe break it down a bit, what projects are in there, how much is in there for Janssen, etcetera? Thanks.
Okay.
Peter may have the FY 2021 numbers in detail in front of him. I don't. But other than that, look, the whole jimbo bar thing, I think, has been the slight misrepresentation. We've known through the mine plan that the grade was going to decline. And we've been signaling to our customers, I certainly have and through our marketing organization for the better part of a couple of years that the grade in jumbo bar was going to change.
Everyone hopes that's not going to be the case, particularly if you're a steel mill. You think, oh, maybe it will be all right and it will be more consistent than they say. Well, it's turned out pretty much as we predicted. And so it's fully accounted fully included in the way that we handle our marketing plans and we provided for it and we're ready for it. So this idea that there's something that's underperformed, that's taken us by surprise is just not right.
And I can yes, I've said I can say hand on heart. I've had discussions with customers. I've been there with Arna Bauhaus and where we've talked about that for the better part of 2 years and to prepare them for that. But sometimes when that happens, even though we prepare people for it, people would rather it hadn't. Of course, I understand that.
Now I forgot what you said your other question, which was maybe It
was on the $8,000,000,000 On the $8,000,000,000 I
just wanted to say something on that. I think what we are signaling, as I've been signaling for some time, we've been going around is that we have a very attractive suite of growth options that we can consider. And we strongly believe for actually for the foreseeable future that we can do them. My follow-up answer to Paul and Taggart applies in a disciplined way and grow this company in a very capital efficient way, but also run our capital allocation framework fairly, so we get decent. Today, they are of course record cash returns to our shareholder.
And the capital bill is likely to be in single digit billions. And what we're seeing today is that as far as FY 2021, that's around 8, and that does include an assumption that we continue with the Janssen project. This is a project that's relatively back end loaded in terms of costs, which gives us some of the flexibility I've been speaking about. But it's in there and it's within the $8,000,000,000 I don't absolutely have the breakdown for FY 2021, but I do know that Janssen is in there. I don't know if Pete Cheshire, but I've been talking he's been able to flick through his notes and give you a bit more.
Look, I'd say, look, FY 2021, we've probably got there's obviously pluses and minuses, but minor in sustaining is probably relatively stable, probably a little bit will add in a bit for things like autonomy and so on, which are coming through. So that's a good thing. And then on the major project side of things, obviously, there's a bunch of things which are underway today, which is includes spend, which are still going to be in that in those numbers. So those are Spence, you've got Mad Dog 2, the Atlantis Phase 3, Ruby and so on. There is also some potential for some projects which haven't been sanctioned at this point in time, maybe a bit for BFX, a bit for TRION and so on.
And as I just mentioned, yes, there will still be some spend on relatively small spend in the scheme of things on Janssen. So that's more or less what makes up the 8. And obviously, I wouldn't comment. I have no idea what consensus looks like and that limit is what it is.
Yes. So just so you're aware in FY and this year, we expect to spend about just over $2,000,000,000 on what we call maintenance capital, which is about asset integrity, reducing risk compliance requirements. And of course, normally, roughly a third to half of that is normally taken up by some form of capitalizing of deferred stripping. And then the balance, if you like, is all inorganic growth. And the kind of the major projects typically take up about 2,000,000,000 dollars Exploration, of course, is there.
That typically takes up about $1,000,000,000 These are round numbers. And the balance is generally a bunch of smaller projects until drilling and latent capacity work, which we, of course, in iron ore want to just sustainably be at 290,000,000 tons a year. And there's some small projects in there as well. And we would actually put Southbank into that category as well. That will be well advanced by 2021, but still underway.
Our next question comes from Hayden Berstow from Macquarie. Please ask your question.
Hi, Hayden. Andrew. Just
a couple for me. Just on the cost outlook again. Obviously, the $8 assumption has been lowered, so you'd assume that would have normally delivered you some wins. So just want to get a better feel for your number one Queensland coal and sort of where you think the risks are to not achieving those medium term targets, which obviously it's a wider range now within $8 is certainly higher than what it was. And have you effectively then sort of backed away a little bit from that medium term cost guidance?
And then also just on the ROCE target, I mean is there any impact to think about there or you're having a few wins elsewhere that some of these cost pressures that we're seeing have offset that, Juz?
Well, I mean, longer term, we have quite ambitious plans to continue to improve on our cost base. I kind of covered in the presentation that we'll continue to grind down on our kind of core functional costs. And they were $3,000,000,000 back in 2014. They're now sitting at $1,500,000,000 We reckon we can take them to about $1,000,000,000 And there's been a wave of activity going on around that. The simplification things like South32 have helped, the way we pulled our functions together on a more global basis.
But now we have major kind of bench marking underway and real changing the way in which we work to get there. So that and that of course is in all of our numbers as well because they are allocated. And then beyond that, we continue to work on our transformation programs and lifting our workforce's capability for which we need productivity or efficiency and effectiveness is part culture, is part also I think new ways of doing our business and is part automation and it's part technology. And who knows where that will take us as we drive forward, but we are very ambitious. On coal, and I think as I said earlier, roughly speaking, we see additional $10 a ton of inflation and that's and to a large extent labor related.
And then we have 2 offsets. One is the dilution of, as we spoke earlier, of getting more volume because we have increased stripping and that starts to come through in a year or 2's time. That effectively consumes the inflation and everything else is then is a net negative, if you like, or reduction. Reduction. And that's down to all those productivity measures, including improved mine planning, which leads to less shorter cycle times for our fleet, which means that we can just move more depth at less cost than would be the case today.
And a raft of all the other things that I've spoken about including the reliability and throughput of our wash plants and also just the inexorable improvement in both the number of hours that a truck is running. And therefore, less time in the shop, less cost in maintenance through a lot of our pressure on maintenance, making sure the trucks are always fully loaded with better and better sensors to tell us that's the case and so on. And so I guess if we do more than that, we might improve on our targets beyond just the $10,000,000,000 but that kind of breaks it down in an order of magnitude way.
Our next question comes from Glen Lawcock from UBS. Please ask your question.
Good morning, Andrew. Two questions. Firstly, just to understand your thoughts now around your steam coal business. I mean previously you had the tax losses at New South Wales, which you wanted to work through and you said selling Cerajon was always we never going to get a good price given the arrangement with your joint venture partners. So just wondering why the change of heart that appears to be being put through the market?
And then secondly, Olympic Dam, if I'm right, it looks like you still made an EBIT loss despite the insurance recoveries. So I was just wondering how long do you persist with this? And do you think you can actually get decent returns out of Olympic Dam sort of in line with your group target? Thanks.
Okay. All right. Sorry, I just was thinking about the Olympic DAN question. One would be your first question and I'll come back to my head.
Steen coal and the portfolio.
Steen coal, yes. Okay, yes. Got it. Got it. I don't think it's been quite the kind of dramatic shift in views that you're seeing, Glenn.
And as we've done the portfolio work, we increasingly have concluded that this is not a business that is going to offer the prospects for growth. And we compete for capital within the capital allocation framework compared to our other businesses. I mean, we always see a more modest outlook and perhaps some see demand particularly for the very long term because of the world's concerns about global warming. But we don't expect that to manifest itself quickly. In fact, we've advocated that coal needs to be part of an orderly transition.
But if you like the plentiful supply of energy coal combined with a somewhat dampening in demand as it's going to form a smaller part of the market share going forward means that this is a less interested asset than others for us to invest in. It's only a 3% of our revenue. We're good at it. Both of our businesses are right at the bottom of the cost curve. And so even in relatively difficult circumstances, they do okay.
And when we've had higher prices over the recent past, they've been good they've been good errors for us, 30% returns. So we're not embarrassed by having them. But as we seek to shape our portfolio going forward, I think we've been clear that this is something that is less critical to us to some other things, but we're not in a hurry. And some of the other issues, I think, you summed up quite well. I think on Olympic Dam, the way to get appropriate returns out of Olympic Dam, as we've said, is barring a dramatic shift upwards in the copper price, which we're not predicting and maybe helped by the uranium prices, which we're not help predicting either.
It has to be ultimately about growing volume. But before we can grow volume, we have to get really convinced ourselves year after year that we can stabilize production at 200,000 tons of copper per year. And while we're doing that, just eat away a bit at our costs through all the productivity actions that I've kind of talked about in the answers to some of our other questions. This year just passed. 1 half of the year, of course, we took a bit of a hit with the asset plant outage.
We continue to work on retruling a lot of our detection systems, so we get early warning of a temperamental nature in our operations. It is a difficult circuit to run. It's been around a long time. It wasn't it was put in relatively inexpensively. And you'll be aware that the system has to work perfectly, because unlike almost any other business in the world, we can't buy and sell intermediates.
We've got to take everything from the mine to finished products, copper cathode and yellowcake. And any disruption anywhere along that chain, unlike say something like Nickel West where we can buy and sell mat, we can buy and sell concentrate. We just don't have that optionality. And so getting that stable operations is absolutely critical as a platform for growth. But again, in line with what I answered to Tom and Tiger's question, we've been careful about that.
We initially thought that we might put in a materials handling system and refurbish an oak shaft in order to develop the Southern mine area. We decided against that to save capital costs and really to just push and understand better what the Southern Mine area can deliver. We've got a better handle on that now and that will lead to more optimal projects in the future once we can get on top of this stabilized base going forward. And you've seen our plan as to how we could do a major expansion. In the long run, Firdapse is a great place to do business.
Adding lots of new copper is not easy, which should ultimately be good for price as we've said. And this is something that we still cherish. We have we know what we're doing here. The kind of performance you're getting out of Escondida today is because we took that same attitude to crushing and conveying. Likewise, iron ore, what you're seeing today, this deliberate attempt to stabilize everything, it's coming to coal in the way I've just described in the answer to your question.
And increasingly, therefore, we're able to divert more and more of our people resources and our ideas and our experience onto Olympic Dam, which has been the last one to move. But everything else has moved and I'm confident we'll do the same for Olympic Dans.
Thanks, Anders.
I don't
know if you want to answer anything on No. Okay.
And our next question comes from Sam Webb from Credit Suisse. Please go ahead.
Hi, Sam. Hi, Andrew. Circling back very quickly, just following up on Glyn's question. Is there an active sales process underway for the energy coal business at the moment?
We're considering a number of options for it, and I'm not prepared to comment you on that.
Okay. Thanks, Andrew.
Our next question comes from Paul McTaggart from Citigroup. Please ask your question.
Hi, again. I had a follow-up on iron ore. So you've given us guidance for the year ahead. Potentially, we might get somewhere near the 2 90,000,000 tonne. But are you confident that that's a realistic
achievable year
on year end target? Or is that sort of a stretch target that possibly we're not going to meet? I'm just trying to get a sense of in terms of how I should think about mine or supply demand modeling in the years ahead.
Okay. Well, I mean, there's 2 questions in that. I mean, of course, we always stretch ourselves. This is an organization which thrives on stretch targets. And in general, we try to offer guidance on what we think is reasonably certain.
And you will have seen that this year, apart from 1 or 2 of the incidents and some of the weather issues, we actually have hit our guidance pretty well. So is 290 a stretch or is it guidance? I mean, the reality is in the last quarter of the year, if you take out the effects of cyclone Debbie, we sort of ran at 2.90 at iron ore, which as you know is 50,000,000 tons above its nameplate capacity, which is a real tribute to some of the things I was talking to in terms of operational excellence. We want to transfer more and more to Olympic Dam when I was speaking to Glyn. And so weather free and incident free for sure, we could do that.
Now we can't completely weatherproof things. That would be at times a ridiculous cost. But we'll do our best to be more weatherproofed in the future. And in everything we're doing in pushing asset integrity in pushing better and better routines for maintenance and the motivation of our people is designed to actually get rid of operational incidents, albeit that we are working even in iron ore with relatively okay. But it's better that way rather than completely raising and rebuilding.
That would be a crazy financial decision. And I would say, yes, 2.90 a little bit of a stretch, but just slightly out of reach rather than out of sight.
Maybe just I think, yes, Paul, we will be able to debottleneck the rail line through the RTP, new signaling technology. So that will add capacity on the rail. We'll obviously be adding capacity via staff length. So that will also take care of business on the mine side. And that bottleneck will continue to be somewhere in between the car dumpers and the stockyards.
And but so I think we've got that reasonably in hand and we'll be there and thereabouts over the next few years. But as I say, once RTP and Safran come in, it will give us a lot more opportunity to be stable at that $290,000,000
Thanks, guys.
Our next question comes from Lindon Fagan from JPMorgan. Please go ahead.
Thanks again. Just a follow-up question on the market. Obviously, a strong year of Chinese steel production this year with a lot of growth. Just wondering if BHP is predicting further growth in 2020 for Chinese steel production?
Not really. No, not really. But of course, it's hard to foresee. And part of the growth this year has come about by a bit of a stimulus on the infrastructure side, which the Chinese probably did as a defense against the impact of some of the trade restrictions. And of course, that's coincided, as you know, with outages in both Brazil and in Australia, aside to the high prices for which of course we've now come off quite dramatically.
There is some indication now coming from our markets that strength of demand is not as it was through the peak periods in China. And of course, we are seeing poorer macroeconomics, particularly in Europe now and some of the more developed markets of Asia. But having said that, I mean, the price corrections that we've seen in iron ore and met coal are still the ones we would have expected. And so that's a lot of that is already in the market. And we'll obviously watch with interest the inevitable development of these trade tensions and what is the and what is the likely Chinese response.
Thanks a lot.
Our next question comes from Paul Young from Goldman Sachs. Please ask your question.
Thanks for Paul. Yes. Hi, again. Maybe a question for Peter. It's a question on the balance sheet and capital returns.
Peter, you said you wanted to maintain the net debt at the bottom end of the range,
which is quite prudent.
You're a bit cautious on pricing, it appears on maybe in the near term. The question is actually around the potential off market buyback versus investing in your business. I know we've had discussions around this on this topic over the years, but you completed a $5,200,000,000 off market buyback last December. Is that something that you'll consider? And I know you can't always speak for the Board, but is that something you'll consider again in December, January?
And And if so, could you actually announce in theory a buyback before the February results say post the or around the AGM? Thanks.
Yes. I guess, Paul, I mean, every time we go to speak to the Board, we inevitably speak to them about where we see our funding and so on. So I suppose hypothetically speaking, yes. No doubt that the Board can or we just showed that we can announce capital management initiatives at any time. But really, I mean, I think we again, as we've discussed for quite a few times in the run up to the shale distribution of the shale process, we go through the capital allocation framework and we do it every time we think about the dividends.
One of the threshold issues that you have to pass through is materiality. This time, obviously, we've got 50%, which is locks the payout ratio locks in the cash amount. What's left over at
this time
was quite very, very helpful, dollars 0.25 but it's $1,300,000,000 So we just that's in the scheme of the size of this organization, that's probably a little on the smaller side of things. And that's pretty much where it is. So I think it was I think it's the right decision for this going around, obviously. We made the recommendation. The Board has accepted it.
That's good.
I don't think there's any questions pending. So we'll just maybe call it a day and look forward to I do anyway look forward to seeing many of you who've been on the line, I think, on Thursday in Sydney. And until then, thank you very much. Hello, everyone, and thank you for joining us. And by us, I mean Peter, Peter Bevan, along with me to discuss BHP's results for the 2019 financial year.
I'm also joined in the room by Tristan Bobgrove, who is our new Group Investor Relations Officer. And some of you, I think, know him already from his previous jobs, but many of you will get the opportunity to meet him again in the next few weeks. In the 2019 financial year we reported on today, we delivered record cash returns to shareholders. The Board declared a final dividend of US0.78 dollars per share and that's approximately 4,000,000,000 dollars in total, and that's on top of the US17 $1,000,000,000 that we returned to shareholders this year. Both higher prices and a solid underlying performance contributed to an EBITDA of $23,000,000,000 at a margin of 53%.
And of course, that flowed through to strong operating cash flows, which after disciplined investment, we converted into a free cash flow $10,000,000,000 Over the year, our return on capital employed, excluding share was 18%. Operationally, strong results in petroleum and iron ore were offset from lower contributions from copper and coal. So taking a longer term view over the past 5 years, BHP's volumes are up 10% and our costs are down by over 20% across our major assets. In the same period, though our iron ore business in Western Australia has increased its production by 20% and reduced cost by 50%. And that makes us now the lowest cost iron ore producer in the world.
And we achieved these results very much through the hard work and ingenuity of our people. And so their health, safety and well-being is and always will remain our highest priority. And to this end, it was tragic that last December, our colleague, Alan Houston, died at BMA Surajhi mine in Queensland. We held a lengthy and thorough investigation, but we simply could not determine the direct cause of the incident. Nonetheless, we have identified several areas that are worthy of improvement and of course we've redoubled our commitment to safety.
So we entered the 2020 financial year with a positive outlook for our business. We have a simplified portfolio, all of world class assets and a strong balance sheet. We have 6 major projects on track and on budget to expand our business and they're spread across iron ore, copper, oil and potash. We have exploration licenses in some of the world's top basins for oil and copper. And we've already made some discoveries and we have options for future development sitting alongside them as well.
And we have an even greater focus than ever on our the capability of our workforce's culture to make it fully empowered and getting access to the technology and the ways of working that can further transform our business. The kinds of improvements that are coming to fruition this year are certainly far from done, probably the better part is yet to come. And I'm confident this is going to deliver value and returns for shareholders for decades in the future. I think I'll leave it there and open the lines to questions. Who's first?
Our first question today comes from Alan Gabel of Morgan Stanley. Alan, your line is open.
Yes. Two
questions from my side. Firstly, on the net debt target. Clearly, you have increased it €5,000,000,000 at the bottom and the upper end of the range. The increase is less than the impact of IFRS 16. How should we interpret that increase?
Is it and why are you become have you become more conservative on your net debt expiration? That's 1. And 2 on the CapEx budget for 2021, Slide 33. Yesterday, you touched on it on the call. Can I push a little bit more on the growth spending there?
How much of that growth in 2021 is on Janssen? And are you spending any money there on the Olympic dam expansion? Thank you.
Okay. So look, these are financial questions. I mean, Peter might want to have a go at both of them. But I think I could very simply say about the lower range of our net debt target post IFRS16 16 at $12,000,000,000 That's true. We have but we have made it about $1,000,000,000 lower than it would have been if we simply just added the impact of IFRS 16 and the leases and the various derivatives and contracts coming, if you like, into the net debt number.
And the two reasons for that, the additions under IFRS are more volatile when they're mark to market. And so we do want to give it a self a bit flexibility given that volatility. But it's also true that the short term outlook given everything that's going on in the world which can be broadly put into this sort of the rejection of globalization and free trade has already affected to some extent the oil price and certainly the copper price. It does give us some cause for concern. And that's why we've made this change to our, if you like, our medium term targeting.
Peter can talk a little bit more in detail, if you like, about the capital budget and how much of Janssen and Olympic Daimler in the FY 2021.
Yes. As I said, there is more
or less as you know, we've been spending €200,000,000 or so on Janssen. We would we've included an amount in FY 2021. We'll have to wait and see really where we get to on the approval and so on. So it's part of the possibilities. And that is the same as Olympic Dam where we I guess, it's a provisional amount that's included for BSX.
But again, it hasn't as you well know, it
hasn't gone to FID.
So if we get there, then we would spend that money. If we didn't, then we won't.
I think, though, it is worth saying, if I may, that both projects, particularly Janssen, if you look at the full project, it's quite back end loaded compared to, say, investing in an oil development or even the more steady state spend or something like a South Bank. But even with that, then we wouldn't in any 1 year, if the project were to go ahead, be spending more than $1,000,000,000 And that would only be for a few years at that. And I think the same would hold with BFX, which of course is a much lower cost and it wouldn't be anything like that.
Yes. I mean, together there would
be less than comfortably less than $500,000,000
In 2021? In 2021. Yes. Okay.
All right.
Our next question today comes from Jason Fairclough of Bank of America Merrill Lynch. Jason, your line is open.
Hi, Jason. Yes, hi, Andrew. Thanks for the call. Look, two quick ones for me. First, Andrew, there's a great headline on Bloomberg, which is BHP CEO says top miner can still profit in any global downturn.
And I'm just wondering is this how you see it? Are we going into global downturn? And what are the signs that you're looking at? And then second question is just on Samarco. So you've taken another charge here related to the accelerated decommissioning of the dam.
I'm just wondering is this it or could there be more to come? I'm trying to get a feel for how much of an open ended liability we have here.
Okay. Well, look,
I mean, I don't write the headlines. I didn't mean to maintain for any second that, of course, the downturn wouldn't result in a decrease in profitability. Obviously, how that shows up will depend on what the impacts are. First off, of course, we do have a good portfolio. And the portfolio at the moment, of course, to some extent is working.
And that we're making probably sort of above average margins in iron ore or have been and to maybe a less extent in net coal And probably it would be the other way around for oil, gas and copper. And depending on what causes and triggers the downturn will depend on whether or how that portfolio might be balanced and to what extent it might smooth things. If it was an oil price shock, clearly, we would benefit from higher oil prices that maybe lower margins than some of our other businesses. But a general downturn, of course, would bring things down and we would have to respond as we could, I think, quite effectively now, Jason. I mean, we have low debt debt pre IFRS 16%, 15% gearing.
We have a much more flexible dividend policy now. We are continuing to save money and to cut costs, become more efficient. And we have and in many ways, the way we're phasing our projects and the discretion we're giving, you've got an indication of that. In the answer on Janssen and OD. We have a lot of ways in which we can change our uses of cash and also to protect shareholder returns.
But I repeat, we don't expect to be immune and to sail through this thing. This is a volatile industry as you know and there can be quite big swings already have been even just in the start of this financial year in the revenue line, not all of which can be dealt with by Ergoix on lower lines. As to whether we see a downturn as a possibility, of course we do. And that kind of is covered a little bit in the answer to the question having a slightly lower debt lower range to the net debt, lower number for the lower the bottom part of the range on the net debt target that we answered a question earlier. I mean, the trade tensions around the world, the resistance that is out there to I think the good things that we can look for from capitalism and from globalization, the existence of many politicians and many countries where the votes are for more protectionism, more nationalism and less globalization and the interference in global supply chains, which we of course fully support, threats to the independence even of Central Bank, all things that we think are good for the creation of wealth, for the creation of GDP that ultimately drive the overall growth for our business.
So it's good that we're ready, a lot better ready than the last time. And we can weather a lot of storms probably better than many companies in the sector. And I think the sector itself, through having been quite disciplined, will actually be able to weather a general downturn better than other sectors. But we're not fully downturn proof. I've gone on too much.
What was your second question again? It's Marco. So Marco. Oh yes, Peter probably should handle that. But the bigger provision is not just for the dam and having to bring forward the decommissioning of a Germano dam, which was the dam that sat behind the Fundio dam as a result of new regulations post Brumadinho.
It also is that we've got much better line of sight. Now as to what we think the likely sort of full compensation that will need to be paid to people who have affected in terms of their living standards or their livelihoods by the dam break. The more serious those affected have already been paid. And of course, we've invested considerably and 2 with great excess in both the resettlement of people and the larger towns are now being rebuilt. We've got all the permits and I've got pictures in my file in front of me of new houses emerging.
And my last visit, the river is looking pretty clean and healthy, but it's this compensation side of things that we still have to work away from us. It's not an open liability. We feel we've constrained it quite well. We wouldn't let it run away from us, if we can put it that way. But I can't guarantee that this is the end.
Anything to add, Peter? No. Okay.
Our next question today is from Sylvain Brunette from Exane BNP Paribas. Sylvain, your line is open.
Good morning. Good afternoon, gentlemen.
Two questions on costs for me. First, a few months ago, there were some reports of labor cost pressures in Australia. I was wondering in the outlook you are talking to if you've noticed these pressures in reseating by now? And the second question related to cost as well and productivity. Maybe to give us a feel of how KPIs at all levels in the group are tied up with cost objectives?
And my last question again related to some press comment in July on BHP's stance on coal. Wondering if the company is now taking a more active step towards reducing its exposure to thermal coal in particular. Thank you.
Okay. So look, I had what was the first question? Yes, labor pressures, that's right. And so yes, I mean, there are labor cost pressures around and they're most keenly felt in Queensland to a less extent in iron ore and not really safe in any other part of our operations elsewhere in the world. But the bigger problem that we have is that because labor is a bit more in short supply, we have higher turnover.
People don't turn up for shifts, particularly people who work on contractors. We've addressed this by our operations services model, where we're actually steadily converting a lot of our more permanent, like contracting workforce and some not so permanent to our own contracting organization for the whole of Australia. We pay contract rates, but we also offer BHP terms in terms of take pay, holiday pay and a lot more training for them to build mastery because it's worthwhile doing that if they stay in unemployment. This has been hugely successful. We've had great uptake of high quality people.
We've slashed the turnover. And so that means that people's safety culture build, culture and productivity build, we'll come to that in a moment. And already we see halving of safety rates and 20% reduction in costs or like a 25% increase in productivity. So I think we're meeting this head on. And otherwise, inflationary pressures other than the ups and downs of things like fuel costs and so on are manageable.
And we believe our transformation programs are designed both to quench inflation of which there is some and go on better so we can continue as we have guide to following unit costs as we go forward. And yes, I mean, look, we have unit cost targets increasingly Our functional cost targets, which are held at my level with the Board. They are then cascaded all the way through to the front line and broken down. So on the pure cost side of things, we took around about $1,500,000,000 of cost out of our functional cost. That is the things that takes for things like legal, HR, external affairs, supply, marketing, technology and lots of other small functions.
They were around about $3,000,000,000 in 2014. We cut them to about $1,500,000,000 through the simplification that came with $532,000,000 in the divestments and also through taking a global view of excellence across all of our functions. We had a bit of an asymptote and we launched a new phase called World Health Functions, rigorous benchmarking down to the level of the sub function. This requires major reengineering and indeed an and moving things to lower cost countries. Those plans have now all been built and are now being delivered.
But $200,000,000 are in the $1,500,000,000 I talked about, but now the $500,000,000 to come mainly this year and next, which will take us from the starting point of $3,000,000,000 to about $1,000,000,000 And they are cascaded all the way through. And then beyond that, we have people who have targets to input many of the new ways of working that will ultimately result in us being able to extend that and extend that to other parts of our business, which has more to do with maybe our variable cost base, if I could put it that way. Clearly, in order to hit lower levels of unit costs and things like iron ore, coal and copper, you have to break all that down within KPIs to the performance of a concentrator, the performance of a strip program and the costs. You have cutting across all of that a whole bunch of things to do, for example, with maintenance to do with supply, which is about things happening on time, maintenance costs being lower. The result is that the higher reliability, some more truckers resulting.
And that's how it's all broken down. But again, I can assure you it goes all the way to the frontline. And we set quite stretch targets. So and we don't always hit those stretch targets, but we don't mind that in some senses. I mean, we see huge possibilities there.
We commit ourselves to get there. We normally aim off of it in our overall guidance to the market. Much stretchier. And if the stretch targets are not hit, in general, we reduce remuneration. And although we've had a very strong year operation, when we look at our competitors, compared to what we the targets we set ourselves is slightly underperformed And so bonuses are pretty low this year, right away across the piece.
You could be assured as shareholders or you can assure your readers as shareholders that we do not hang on to extra dollars that we haven't yet by meeting our stretch targets to pay ourselves. We pass it all the way through to the shareholder or of course through our capital allocation framework and reinvest it wisely. So BHP Coal, I mean, what Peter and I signaled around biomass strategy was that we do not expect to invest anymore in our energy coal businesses. And that's for pure commercial reasons or financial reasons. We do think this is a business whose demand will be under pressure partly because of the transition towards cleaner air and to confront the challenge of global warming.
But this is a resource that compared to some of our other commodities is in relatively high abundance. And so we see squeeze margins in the future. But we've made a lot of money recently. We're sitting at the bottom of the cost curve. We don't expect our mines as Terre Haan and out of Mount Arthur allow them to close anytime soon.
In fact, we think they'll probably be around for quite a few decades to come. And probably maybe not as profitable as some of our other operations in other commodities, but certainly decent. Returns of late have been typically around 30%. I mean, we're not investing so the denominator is wasting a little bit as well. And we only 3% of revenue at the moment is coming from coal.
Given that we continue we will be investing in other commodities that will reduce its share of the portfolio. And yes, we will examine other options, which when we have more to say, we'll see it.
Thank you.
Our next question today is from Myles Alsorp from UBS. Myles, your line is open.
Yes. Great. Three questions. First of all, on petroleum exploration, you're saying that you expect material production in the mid-twenty 20. What does that mean
in terms of FID for some
of these projects like Wazen, like Trion, like Trinidad? Are we should we expect some sort of progress over the next 12 months to meet that sort of mid-twenty 20 ramp up? And then secondly, on Queensland Coal, looking out to your medium term cost guidance, I mean, there's a big step down. And how achievable is that? Is that only achievable to deliver normalized volumes?
Or are there other factors in what proportion of that $15 a ton can be delivered without a big step up in volumes? And then, so lastly, just it'd be interesting to now that you've paid out a record dividend, it's delivered a strong balance sheet. What's your top priority now, Andrew, before retiring?
Okay. So Peter will deal with the 3rd question. Let me I'll handle the first two. Geraldine Flatly will be going around investors in November and where she will be laying out our strategy for our whole petroleum company going forward. And she will definitely address some of the emerging development plans for our major gas discovery in Northern Trinidad and Tobago.
For Preon, we've announced today that that's coming in a bit bigger or a bit oilier than we expected, which is good news. And Wildling as well. You have seen that we've sold Samurai, which was where we participated in, which is to the north of Wildling. That gave us a better idea of what kind of production we could get out of Wildling and what a tieback would make. And she'll be able to talk to you on all of these going forward.
But it's obviously it's going well. And when you combine that with the projects underway at Mad Dock 2, Atlanta 3 and now Ruby, this is going to reverse the decline in our oil and gas production in the next few years. It's going to start climbing again, which is a good outcome, but of course one that was fully supported by our decisions in the capital allocation framework. Just as an aside, I meant to say earlier that the discipline we have on KPIs that Sylvain asked about, that pertains very much to the separation of shale. We've taken a business where effectively we've removed about 2 thirds of its operating footprint.
And but we've managed to remove almost without any trading overheads. We have a smaller business now, but one which because of the exploration discoveries is probably gone a long way already to replacing some of the volumes that we actually that we sold with the shale business. So that's a very good news story. Look, on Queensland Coal, it's a bit of both Miles. There is a bit of inflation there that we spoke about earlier.
Take round numbers, it's $10 a ton inflation. And we have $20 a ton going in the opposite direction. About half of that is from just simply volume dilution. I can't remember how you described that, but it's with the additional stripping we have been doing, the greater amount of coal that will be available to mine that is going to obviously help dilute some of the fixed costs and that will give us $10 a tonne back. And then the remaining $10 is just through all the productivity we're thinking about.
About half of that from memory comes from just improving cycle times, which is better mine plans and just higher truck hours and then a range of a number of small initiatives which round numbers, another 5 to get you say minus 10 plus 10 and minus 20. And stretch target to aligns that we can possibly do a little bit better than that. But and we have quite aggressive targets there. We took a slight turn to it for the worse than having to entertain a lot more stripping, some of which wasn't fully foreseen. But I think we've got a better view of what the mine plans look in the future and we're adding into that now.
And I should say that some of the productivity things comes from automation. And we did mention in our talk our morning view last night that we're almost there in getting full approvals to fully automate the truck fleet at Goonyella. And we've got 1 or 2 others lined up as well. We just have to line up partners. We have to line suppliers before we can tell you the details.
Peter will talk to you about the capital management piece.
No. Actually, I think Miles asked you what your priority was. And I'm happy to answer your behalf. So I'm sure I can have that again. Hopefully, after all these years, we'll more or less answer the same thing.
I'm not sure how to take that risk. My top priority for now, I would say, gosh, clearly, I mean, I've got a few things that are very important to me, but I do think that just making all aspects of the transformation program stick is critical. This is what potentially tens of $1,000,000,000 of value to us. It's about 70% of the value uplift. The other 30% comes from growth.
And I'm very confident in our plans to reduce functional costs. And I'm equally confident in some of the pushes we have in really getting this kind of step up in power culture to the frontline. Where I'm perhaps a bit more thoughtful is just the right way to pull through technology to make sure we don't just do technology, but technology is safe. We invest in those which have the that includes automation, which have the highest returns and path of capital allocation framework. And at the back end of that, we are now seeing the ability of enormous amounts of extra data.
When we put in our backbone as a company of a single ERP, we thought we were catching roughly about 80% of the data of the company putting on a common system. Now the data we're getting from trucks, from engines, from people, from tires, we're probably only catching about 20% of the data. And how we really use that data in a world of increased sensors, in a world of increased artificial intelligence and indeed how we do white collar automation, I think is another big prize that is waiting to make another step down in costs or increase in efficiency. And so making sure that all hangs together is important to me. And well, you've heard that how we are part of the global response to climate change is something that has given me a favor to do as well.
The projects of the growth are all good and I'm happy with that and they're coming through. But just because I've given you my top priority doesn't mean they don't get a fair bit of my attention, they do.
Okay. Thank you.
Our next question today comes from Raynaud Gootes of Melendian. Raynaud, your line is open. Reinhard, your line is open. Please ask your question.
Maybe try someone else. You can come back to him.
Sure. Our next question is from Ian Russo of Barclays. Ian, your line is open.
Hi, guys. Just two questions, Amy. The first one just on your dividend policy. I'm just curious if you think the payout ratio is still an appropriate one. The sector seems to have lost quite a decent chunk of the income investors to producers as they have maintained their progressive dividend policy.
So I'm just wondering if you maybe can share your thoughts on progressive dividend policy now that the business is much more robust than what it was 3, 4 years ago when you abandoned that policy?
You had a second question? You said 2.
Yes. And the second one, again to you, Andrew, just on your comments previously, including the conference call overnight that you believe the business can basically grow over time as single digit €1,000,000,000 CapEx figures within the capital allocation framework. So I was just curious or just wanted to put you on that is whether you imply then that you can basically not go above SEK 9,000,000,000 even if you improve the FX and Janssen maybe over the medium term?
Okay. Look, well, let me have a rest and Peter can talk to you about dividend policy and then I'll come and talk to you about CapEx.
Sure. Look, I think the dividend policy was not put we didn't think through dividend policy as some sort of reaction to what was going on at the time. It was it is the we strongly believe
the more appropriate dividend policy for
a company such as ourselves. I mean, at the top end, the amount of payout ratio will ensure that there is a healthy payout. The bottom end, of course, it allows the dividend to flex along with the cycle. We've had in many years now quite a few years of experience in deploying it through ups
and downs. And I
think it's been entirely appropriate. I think most importantly, when you think about your capital allocation framework, you think about your balance sheet, you think about your dividend policy, do those in fact support the overarching strategy of the company to grow value and with that returns and of course cash returns to shareholders. And so those are why we have the settings on our balance sheet. That's why we have the settings on our dividend policy. Ultimately, those are appropriate and they underpin the overarching strategy.
So we're perfectly comfortable with how it's performing. Yes. Look, I think it's hard to
see the courses. And I'll take the word for it that some investors clearly want more of a guaranteed dividend through thick and thin. And maybe they get that with some of our competitors in the oil and gas sector. But I've also met those self same investors or maybe not those ones who've commended our capital allocation framework and bemoaned the fact that the oil and gas industry has adopted what we do. So maybe there's been a little bit of sorting, but we've had a lot of praise and congratulation for our capital allocation framework and its transparency.
And it definitely gives me, as we were talking earlier, about possible downturns, a sense that we are much more built to have some protection in the down size, but better than that to have the ability to do things in the downturn, which are best done countercyclically and be on our best behavior and therefore be more disciplined spenders at points in the high points in the cycle. Having the sectors become more disciplined, which is why even though we might be facing a bit of a downturn, the impact of that is perhaps more reassuring than it might once have been and I think particularly for us. Look, on the CapEx, yes, I think it's pretty much what I say. We do a lot of forward modeling, 5 years, 20 years. And what we tend to find is that what works well for this company and now that we've become much more efficient in the way we use capital.
And that is only going to improve as we take the success we've had in the reliability of our large projects, the movement of the smaller projects get better and better. That's really shifting and sorting those projects better and better execution by delaying and studying longer rather than rushing to avoid some disruption because of the time value of money, which is often actually less valuable than the time value of delay and thinking things better and doing the right level of derisking. Now that doesn't mean that it's going to be flat because there are lumpy the long term capital projects. So it is going to oscillate around something which on average I think for a while is going to be single digit billions. And we're going to be able to grow the company.
And typically that growth, of course, some of it comes from making things more efficient. It doesn't always show up as more volume, but volume is a partial surrogate. And it normally shows up on a kind of over a long period, but averaged out again a bit lumpy. It's on the order of 2% to 3% copper equivalent growth per annum. Look, I mean, Janssen and On OD fit into that.
These are not enormous projects. As I say, we've originally said that when we get going that Janssen is going to cost round numbers. I think it's $5,000,000,000 Is that right? And but it will be spread out probably over the at least over many years. And probably in any one year, we would anticipate spending more than $1,000,000,000 And VFX, particularly if we don't go into our material handling facility or we just use a decline and we don't recommission a shaft.
That's going to be much smaller and that I would think. And therefore, they will fit very well within the envelope of single digit billions in our capital budget. And in our planning, they do so. I mean, some of the things I've talked about include short and medium and long term things where we do both those projects.
Okay. That's very clear. Thank you.
Good.
Our next question today comes from Christian Georges, Associate General. Christian, your line is open.
Yes. Thank you. Good morning. Two questions. Nickel West, I think that the performance this year was again slightly below your expectations.
I mean, would you expect this to be improving gradually? And how would you place this in the current context of a remerged reduction of Indonesian nickel exports and the easier outlook for nickel price now a lot more supportive justifying to accelerate perhaps investment in nickel West? And the second question is what's your thoughts about what seemed to be a renewed interest for the West African iron ore assets in Guinea? And so I mean, is it coming closer to becoming a future source of low cost iron ore? Thanks.
Okay. So yes, I mean, we are a little bit disappointed in the nickel performance. I mean, it's not through the best efforts of our team, but they have had 1 or 2 operational hiccups. So I think don't get quite the coverage that's when we do things in iron ore or copper happens. And yes, and until recently, the second part of your question, they've been dealing with sort of lower prices than we might have expected.
But they have picked off in anticipation into a quicker renewal of the export of unprocessed LASER BITE from Indonesia. Of course, while we're holding this asset that we're anticipating that as we get closer to the lift off of electric vehicles, the demand for high purity nickel that has to be made from sulfides not light rice, at least that's what it looks like today. And therefore, you'll get a different kind of margin for that kind of nickel product. That's not going happen until probably another 8, 10 years on our forecast. So we're building slowly for that and therefore it's an exciting option to hold.
The return to fashionability of nickel sulfides means that we're doing more brownfield exploration with some success. And over time, of course, we will invest in developing those discoveries and maintaining our supply of nickel and probably building its production significantly above its current levels, which is about 90,000 tonnes a year from memory. Yes, so it's all there. As with everything, it has to pass through a cash collecting framework, has to compete with the BFXs and the Janssen on the other way around and all these oil development projects that Miles asked me about. And but certainly at these prices, it will do a lot better this year, particularly if they can continue on their cost journey and avoid 1 or 2 of the incidents that took it into cash negative territory in the year just closed.
I don't have
a lot to say on West African iron ore. I mean, it's been there or there about it for a long time. Clearly, if Africa urbanizes, it would be probably sensible for it to be developed. And it would certainly provide a competitive supply of iron ore, particularly into the Atlantic market against Brazilian iron ore. Now that these markets aren't connected Pacific to Atlantic, they are well and truly.
We've always said that either West African oil or the cooling of the steel industry in China, more recycling in China not immediately replaced by similar growth in India is likely to flatten the annual cost curve and take us into price territories where it would be much less attractive business as it is today, which is why we create the options we have in potash, in nickel and in copper and in oil and gas.
Just to add to nickel, I mean, we were profitable at the EBIT line. And yes, we spent some capital. That was really just on Jacobindi on VINIS.
Yes. As far as the RV, we are getting to leave a future growth. Yes. It's necessary good capital. Yes.
That's fair point. Yes. Okay. If there's no further questions, the things that are and the guy who didn't come through hasn't come back. So look, we'll provide to everyone.
And just to recap over the 2019 financial year, I would say that the disciplined execution of our plans have delivered strong performance, strong cash flows and record returns to repeat myself to shareholders. We will absolutely carry this momentum into the current financial year, but we do expect copper cooling volume was at 2 percent. Despite a 7% decline in petroleum volumes, largely due to fuel decline, which the team have done an amazing job at arresting this year. Maybe they can last year, early again this year, but it's pressure is declining and we haven't yet invested enough to replace that quickly. That comes as a settlement in a few years' time.
We will invest less than €8,000,000,000 in our quality set options. And spot prices this will further increase our portfolio or our calculated cost of spot prices to 9%. We've got a few weeks back, it would have been a bit higher than that, which is a test to the volatility and some of the near term uncertainty we're facing. But we're giving comfort from our strong balance sheet. Yes, our flexible dividend policy, even if it has some detractions and are solid and hopefully improving operation performance bolstered by many of our transformation programs.
And we expect the effort to improve further and our unit costs to more than, I think, quench inflation. And of course, that additional cash along everything else that I've spoken about will position us well to weather any future uncertainty and to deliver strong returns and grow value through the cycle for decades to come. So thank you for listening.